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On the same day, Moodys downgraded Carnival Corporation’s credit rating and the World Health Organization declared Covid-19 a global pandemic. David Bernstein, the financial head of the cruise company, was watching a play about the fall of someone else who was in the Broadway theater district of New York. corporate behemoth.
The March 11 screening of the Lehman Brothers Trilogy was the last in 2020 at the Nederlander Theater. Earlier this week, the coronavirus crisis forced the closure of residences, as the global economy became one of the worst crises since Lehman fell to the peak of the 2008 financial crisis in 2008.
On the California coast, more than 2,000 miles away, 3,500 passengers were stranded on the Grand Princess, which had been exposed to the virus and was unable to dock on the Carnival ship. It was the beginning of a storm that would destroy the maritime travel industry.
Bernstein, then 62, traveled to New York to meet his new grandson, who had been born a few weeks earlier. He tried to buy a face mask for the flight back to Miami, but the pharmacies were sold out. When he arrived at La Guardia airport on March 14, the terminal was empty.
“It was a terrible feeling.” he said. “As a result of that trip home, I realized how dramatically the world had changed.”
By March 2021, Carnival had burned more than $ 7 billion in money. The group had a net loss of $ 10.2 billion in the 2020 fiscal year, with revenue down 73 percent. As a sign of the financial scars, the Carnival credit rating was subtracted from A, from a higher investment rating, to B, a rating associated with risky businesses.
The carnival was mainly caused by the ability to raise $ 23.6 billion in debt and equity investments in less than 12 months, pushing it to become one of the largest issuers in the U.S. junk bond market.
His story shows the recovery of a pandemic debt that has taken over the world, aided by the historic interventions of central banks that have sided with large companies with access to capital markets. It is also a symbol of last year’s indebtedness, as companies now face a wide pile of debt.
“It’s really amazing,” said Pete Trombetta, an analyst at Moody’s who specializes in valuing cruise lines. “Without entering capital markets [Carnival] I wouldn’t get this far. “
Crisis interviews
Bernstein has already begun crisis talks with JPMorgan, Goldman Sachs and Bank of America to save Carnival from the economic impact of the virus that was spreading in late January.
As the number of cases increased and the government began to take drastic measures to combat the spread, the talks became more urgent. In March, the amount the company needed to borrow rose from about $ 1 billion to $ 6 billion. Bernstein said he was “planning the worst”.
There was no solution outside the table. In addition to talking to banks and analyzing public debt offerings, Bernstein spoke to “almost every major private equity firm in the United States” about possible financing packages. It sold directly to small loan consortia and the sale of equity to private investors.
Unknown territory was the CEO of a company with an investment level, accustomed to the usual financing opportunities. “During March, I had the most comprehensive education of all the possible financial instruments available to us at the time,” Bernstein said.
He slept for only three or four hours a night, waking up at 4am in the east to talk to European investors because of the urgent need for money.
A group of funds made up of Elliott Management Corporation and Apollo Global Management provided a multimillion-dollar loan with an interest rate close to 15 percent, according to people familiar with the deal. Sixth Street also approached the banks in March with a list of companies that would consider financing, eventually offering $ 1.5 billion to Carnival to turn it into a capital and position itself behind a public and reliable guarantee on the seniority ladder. Details of potential packages were first reported by the Wall Street Journal.
But on April 1, the company only went to public markets, and $ 4 billion bond, backed by its 86 buckets, convertible notes and equity – has been added to provide convenience to lenders.
The result was very different. Calls and emails between bank chiefs, private equity chiefs and Bernstein were rushed, said those familiar with the deal. “Decisions were made at 11, 12, 1 p.m., the day before, which was the most appropriate structure,” Bernstein said.
The reason for the carnival to move away from private capital offerings came at a cost, Bernstein said, aided by fierce demand for investor bonds. Carnival secured an 11.5 percent coupon for a three-year guarantee bond, which is still the interest rate associated with some of the world’s most serious companies.
The carnival deal was a pivotal moment, not only for seafaring, but also for American corporations, as it showed that the capital market remained open to the companies most affected by the Covid-19 crisis.
Investors, bankers and analysts say such agreements would not have been possible without the Federal Reserve, and among other measures that calmed the turbulent markets on March 23, they made an unprecedented decision to start buying corporate bonds.
People familiar with the proposed private equity agreements say the nature of the talks has changed as soon as the Fed’s announcement arrives.
Bernstein said he believes Carnival would overcome the crisis even without the central bank’s push, but “to this day, I have no way of judging what would have happened if the Fed had not done what it did.”
The fundraiser was a bailout, giving the company enough money to last until the end of the year, according to S&P Global Ratings estimates. The focus was on changing the key terms of the agreement documents with ten different organizations, partly to help the company raise more money in the future.
The company raised another $ 2.8 billion in the loan market in June, continued $ 1.3 million bond in July and another $ 900 million bond in August. Private equity firms were called from time to time, but “it became clear that public markets were available and that there was a better alternative,” Bernstein said.
“From the lender ‘s point of view, if you have borrowed [a company] then you don’t want the money to go bankrupt, “said John McClain, portfolio manager at Diamond Hill Capital Management, noting that Carnival is now almost too big to fail from a debt market perspective.” You’ll give them more and more money until they get back to normal. ”
Vaccine “game changer”
Bernstein had just come out of the shower on the morning of November 9 when he received news from Pfizer and BioNTech developed a coronavirus vaccine that was 90 percent effective. “I was left alone. I realized it was a game changer, ”Bernstein said.
The company’s bonds had already begun in the summer. They hit even harder on vaccine news. Carnival stock prices rose from $ 13.71 at the end of October to $ 21.66 at the end of 2020. The end was in sight.
“It was never about survival. I knew we would survive. What would we be like? ”Said Bernstein, adding that the announcement of the vaccine had greatly reduced the possibility of confusing corporate restructuring.
The current company still looks very different from what it had in early 2020. The carnival has $ 11.5 billion in balance on its balance sheet after the $ 3.5 billion bond contract ended in February, enough to last for next year, even with zero revenue. . It is still locked in negotiations with the authorities in the US, the most lucrative market, to get permission to resume sea voyages.
He is also defending the class action lawsuits brought to the U.S. by more than 100 passengers who said they were caught in a carnival boat in February and March last year while on board the Carnival.
Even when the profits are returned, a larger portion of the Carnival money will have to be directed to its high-debt service. Carnival has paid more than $ 1.2 billion in the past year, up from $ 200 million in 2019.
“There’s still a lot of risk here,” Moody’s Trumpets said, adding that the increased burden of interest “hinders” the Carnival’s focus.
Bernstein says he is working to extend Carnival’s debt through new fundraisers and reduce the amount the group has to spend to pay interest. It also hopes to restore the company’s precious level of investment.
“It will be a few years before our balance sheet returns to where Covid was,” he said. “Our goal is to get back to that level.”
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